727 F.

2d 741
84-1 USTC P 13,558

FIRST NATIONAL BANK OF FAYETTEVILLE,

ARKANSAS, Executor of
the Estate of Jesse W. Cannon, Deceased, Appellee,
v.
UNITED STATES of America, Appellant.
No. 82-2494.

United States Court of Appeals,

Eighth Circuit.
Submitted Sept. 14, 1983.
Decided Feb. 10, 1984.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Robert A.

Bernstein, Douglas G. Coulter, Atty., Tax Div., Dept. of Justice,
Washington, D.C., for appellant; W. Asa Hutchinson, U.S. Atty., Fort
Smith, Ark., of counsel.
Lewis D. Jones, Jones & Segers, Fayetteville, Ark., for appellee.
Before HEANEY, Circuit Judge, FLOYD R. GIBSON, Senior Circuit
Judge, and JOHN R. GIBSON, Circuit Judge.
JOHN R. GIBSON, Circuit Judge.

The First National Bank of Fayetteville, Arkansas, executor of the Estate of

Jesse W. Cannon, and trustee for the Jesse W. Cannon Scholarship Foundation,
recovered $122,657.88 it had previously paid pursuant to the Internal Revenue
Services' deficiency notice. The district court1 in its judgment concluded that
the provisions of 26 U.S.C. Sec. 2055(e)(2) (1979) relating to split-interest
trusts were not applicable because Jesse's widow, Grace Cannon, had elected to
take against his will and received the funds as though the husband had died
intestate and had no interest in the trust.
The facts are not in dispute. The issue was ruled by the district court on cross

motions for summary judgment. Jesse Cannon's will left the residence to his
wife, Grace, and established a trust of the remainder of his estate to establish a
scholarship fund for students at the University of Arkansas. The portion of the
will establishing the scholarship foundation to be administered by the bank
directed that from the net income of the trust the trustee was to pay his wife,
Grace, the sum of $100 per month. Grace elected to take against the will, and
an order of the probate court of Washington County, Arkansas, based on an
agreement between the bank as executor of the estate and Grace, decreed that
Grace would receive nothing from the will of Jesse, but the estate was ordered
to pay Grace a lump sum of $50,000 plus $600 per month during her lifetime.
Grace received the monthly payments until her death on August 31, 1975. On
July 30, 1976, eleven months after Grace's death, the probate court of
Washington County, Arkansas, closed the estate of Jesse Cannon except for a
determination of the tax liability question involved in this case and authorized
the Foundation to commence operation of the trust. It found that the Foundation
was the sole residuary beneficiary of the last will and testament of Jesse
Cannon and transferred the accounting responsibility for the trust on that date
to the Chancery Court of Washington County, Arkansas.

The bank as executor of the estate filed a federal estate tax return showing that
no federal estate taxes were due and claiming a charitable contribution to the
Jesse W. Cannon Scholarship Foundation in the amount of $439,556.36. The
IRS ruled that 26 U.S.C. Sec. 2055(e)(2) of the code had not been complied
with and a deficiency notice was directed to the bank. The bank paid the sum of
$122,657.88 pursuant to the deficiency notice, and thereafter applied to the
Chancery Court of Washington County, Arkansas, for an order amending the
trust to comply with the provisions of this section. The Chancery Court entered
an order nunc pro tunc amending the trust to comply with the provisions of Sec.
2055(e)(2) and to meet the objections of the Internal Revenue Service to its
previous order entered in 1978.

The district court found that the Foundation qualified as a charitable use
pursuant to the provisions of 26 U.S.C. Sec. 2055(a) (1979 and
Cum.Supp.1983). Based on the facts set forth above, the court concluded that
Grace was never a beneficiary of the last will and testament of Jesse, that she
was entitled to nothing by virtue of the trust created in his will, and that the
provisions of 26 U.S.C. Sec. 2055(e)(2) are not applicable. It further found that
if the provisions of the trust had been applicable to the widow, the chancery
court's order of July 14, 1981, would have modified the trust to comply with the
requirements of 26 U.S.C. Sec. 2055(e)(3) (Cum.Supp.1983).

The United States, for reversal, argues that the district court erred both in its

holding that 26 U.S.C. Sec. 2055(e)(2) is inapplicable and in its finding that
even if Sec. 2055(e)(2) were applicable, the trust had been sufficiently
modified as provided in Sec. 2055(e)(3) to qualify for the deduction. The
government agrees that Grace did not take her interest under the will. Even so,
Sec. 2055(e)(2) provides that when an interest in property "passes or has passed
from the decedent ... [to a charitable beneficiary] and an interest ... in the same
property passes or has passed ... from the decedent ... [to a non-charitable
beneficiary] ..." the statute applies. Because interests in the residue of the
decedent's estate passed from the decedent both to the widow and the
Foundation, it argues that 26 U.S.C. Sec. 2055(e) is applicable to the charitable
bequest.
6

We conclude that the district court correctly ruled that 26 U.S.C. Sec. 2055(e)
was not applicable although for different reasons than those articulated by the
district court.

I.
7

The government argues that the inapplicability of 26 U.S.C. Sec. 2055(e)(2)

was not a proper basis upon which to base a decision because that particular
ground was not raised in the taxpayer's claim for refund. According to the
government, the only ground for recovery raised by taxpayer's claim for refund
was whether the charitable bequest qualified for deduction under Sec. 2055(e)
(3) as a result of the post-death modification of decedent's will.

A ground for refund neither specifically raised by, nor included within the
general language of, a timely claim for refund cannot be considered by a court
in which a suit for refund is subsequently initiated. E.g., Angelus Milling
Company v. Commissioner, 325 U.S. 293, 295-99, 65 S.Ct. 1162, 1163-65, 89
L.Ed. 1619 (1945); United States v. Felt and Tarrant Manufacturing Co., 283
U.S. 269, 272-73, 51 S.Ct. 376, 377-78, 75 L.Ed. 1025 (1931); Ottawa Silica
Co. v. United States, 699 F.2d 1124, 1138 (Fed.Cir.1983); Group Life and
Health Insurance Co. v. United States, 660 F.2d 1042, 1059 (5th Cir.1981) cert.
denied, 457 U.S. 1132, 102 S.Ct. 2958, 73 L.Ed.2d 1349 (1982). Section
7422(a) of the Internal Revenue Code of 1954 provides that no suit shall be
maintained in any court for the recovery of any internal revenue tax until a
claim for refund has been filed with the Secretary of the Treasury, "according
to the provisions of law in that regard, and the regulations of the Secretary
established in pursuance thereof." Section 301.6402-2(b)(1) of the Treasury
Regulations requires that the claim set forth in detail each ground upon which a
refund is claimed and facts sufficient to apprise the Commissioner of the exact
basis thereof.

Although taxpayer's claim for refund specifically refers to Sec. 2055(e)(3)

rather than merely questioning the applicability of Sec. 2055(e), it is evident
from other documents in the record that the basic issue in the case involved the
applicability of Sec. 2055(e) and that the IRS was aware that that was the
nature of the claim. In the notice of deficiency sent to the taxpayer the IRS, in
its explanation of adjustments, stated simply that the deduction was disallowed
under the provisions of Sec. 2055(e). Besides specifically mentioning Sec.
2055(e)(3) and attempts to comply therewith, in the claim for refund filed by
taxpayer there is also a general statement to the effect that a refund is owed to
the estate because a charitable deduction should be available to the estate. Also,
contrary to what the government alleges, taxpayer did raise the issue of
applicability of Sec. 2055(e) in its complaint. Paragraph 7 of the complaint filed
in the district court states that "the claim for refund is based upon Sec. 2055(e)
(3) and the entire Sec. 2055 deduction ...."

10

The reasons for the rule requiring a taxpayer to state the grounds for his claim
are "to prevent surprise ... to give adequate notice to the Service of the nature of
the claim and the specific facts upon which it is predicated, thereby permitting
an administrative investigation and determination ...," to provide the
Commissioner with an opportunity "to correct any errors, and ... to limit the
scope of any ensuing litigation to those issues which have been examined ...."
Union Pacific Railroad v. United States, 182 Ct.Cl. 103, 109-10, 389 F.2d 437,
442 (1968).

11

Where the claim for refund states general grounds for relief, an item raised in
litigation, but not specifically mentioned in the claim will be permitted if the
taxpayer adequately alerted the IRS to the fact that the item is a ground for
refund. Ottawa, supra, 699 F.2d at 1139 n. 6; Helis v. Usry, 496 F.2d 1319,
1321 (5th Cir.1974); Union Pacific, supra, 389 F.2d at 442. In this case both the
taxpayer's claim for refund and his complaint filed in court refer to Sec. 2055(e)
and the availability of a charitable deduction thereunder. The inapplicability of
Sec. 2055(e) falls within the general language of the grounds raised in the
taxpayer's claim for refund. It has been held that merely stating a section of the
Code on which the taxpayer relies is sufficient notice to the IRS of the nature of
the claim. St. Luke's Hospital of Kansas City v. United States, 494 F.Supp. 85,
91 n. 1 (W.D.Mo.1980); Santa Cruz Building Association v. United States, 411
F.Supp. 871, 876-77 (E.D.Mo.1976). Cf. Walker v. United States, 143 F.Supp.
566, 567 (N.D.Tex.1956) (merely stating that collection of penalty is
unconstitutional is sufficient).

12

In Ney v. United States, 171 F.2d 449 (8th Cir.1948), this Court reiterated that
a taxpayer cannot, after having filed a claim for refund on one ground, shift to a

totally different ground in his subsequent action to recover. 171 F.2d at 451.
That is not the situation in this case. The issue of the inapplicability of Sec.
2055(e) is integral to the grounds specifically raised in the refund claim and
thus may be considered as part of the initial ground. See Ottawa, supra, 699
F.2d at 1139. We conclude that taxpayer's claim for refund met the required
standard of specificity. Therefore, the inapplicability of U.S.C. Sec. 2055(e)
would not be an improper ground on which to base the decision in this case.
13

Even if taxpayer failed to satisfy the procedural requirements of Sec. 301.64022(b)(1) of the Treasury Regulations and U.S.C. Sec. 7422(a), the government
waived its right to object to the sufficiency of the taxpayer's claim for refund
because of its failure to timely raise its objection. Helis, supra, 496 F.2d at
1321. Waiver may occur either by a very tardy motion on the part of the
government or by action on the merits by the IRS. See, e.g., Angelus Milling
Co., supra, 325 U.S. at 296-98, 65 S.Ct. at 1164-65. The government did not
raise its objection before the district court, but raised it only after judgment in a
memorandum filed in support of a motion to amend the judgment in relation to
the interest to be assessed on the taxpayer's refund. The government waived its
right to object to the sufficiency of the claim for refund when it waited to do so
until judgment was entered.

II.
14

The government argues that Sec. 2055(e)(2) 2 is applicable, that the chancery
court's orders fail to modify the trust so as to qualify under Sec. 2055(e)(3),3
and that, therefore, no charitable deduction is available. The taxpayer contends
that Sec. 2055(e)(2) is inapplicable because a split-interest trust was never
created in that Grace's interest did not pass from the decedent nor was her
interest in the same property as that of the charity.

15

Section 2055(e)(2) of the Internal Revenue Code of 1954 provides that an

estate tax charitable deduction is not allowed for transfers of property to a trust
which has both charitable and non-charitable interests unless, in the case of a
remainder trust, the trust is in one of three qualifying forms: a charitable
remainder annuity trust,4 a charitable remainder unitrust,5 or a pooled income
fund.6 The charitable remainder bequest to the Scholarship Foundation as
originally set out in decedent's will was not in one of the three prescribed forms.

16

Section 2055(e)(2) applies when the non-charitable and charitable interests pass
"from the decedent" and are "in the same property." As is conceded by the
government, and was found by the district court, Grace did not take her interest
under the will. However, property may pass from the decedent in a variety of

ways other than by will. In determining whether an interest in property has

passed from a decedent, 26 U.S.C. Sec. 2056 and the regulations thereunder
relating to marital bequests are applicable. Treas.Reg. Sec. 20.2055-2(c)(2)(e)
(1983). According to the Treasury Regulations7 a property interest gained as a
result of electing against the will and a property interest assigned or surrendered
to a surviving spouse as a result of the settlement of a will contest are treated as
having passed from the decedent to his surviving spouse. See First National
Exchange Bank of Roanoke v. United States, 335 F.2d 91, 93 n. 7 (4th
Cir.1964); Allen v. United States, 359 F.2d 151, 155 (2d Cir.) cert. denied, 385
U.S. 832, 87 S.Ct. 71, 17 L.Ed.2d 67 (1966).
17

Although we agree with the government that Grace's non-charitable interest

"passed from the decedent" even though she did not take under decedent's will,
we affirm the conclusion of the district court that Sec. 2055(e)(2) is not
applicable on the ground that the non-charitable and charitable interests are not
in the same property.8

18

We find support for our decision in Oetting v. United States, 712 F.2d 358 (8th
Cir.1983), a recent opinion by this court involving a somewhat similar issue. In
Oetting the decedent's will created a trust, the beneficiaries of which were both
charitable and non-charitable. Pursuant to the terms of the will, $100 a month
from the trust income was to be paid to three elderly ladies so long as each
lived. Any remaining trust income above this amount was to be divided equally
among five remainder beneficiaries, four of which were qualified charities. By
the terms of the trust agreement, the trust would terminate upon the death of the
last of the three elderly ladies, and the trust corpus would then be distributed
outright in equal parts to the five remainder beneficiaries. Oetting, supra, 712
F.2d at 359.

19

The trustees petitioned for and the Circuit Court of St. Louis County entered a
decree providing that trust assets be used to purchase annuities for the elderly
ladies, guaranteeing payment to each of them of $100 per month for life, and
that four-fifths of the assets of the trust be distributed to the four charitable
beneficiaries immediately.9

20

The executor filed an estate tax return, claiming a charitable deduction in the
amount which had been transferred to the charitable beneficiaries. The IRS
disallowed the charitable deduction under 26 U.S.C. Sec. 2055(e). On appeal
this Court held that although the will created a split-interest charitable bequest,
a charitable deduction was available because, after the court decree, the
property in which the non-charitable beneficiaries had an interest was capable
of being measured and severed from the solely charitable property in the

residuary estate. Oetting, supra, 712 F.2d at 362.

21

The circumstances in Oetting and the present case are not exactly the same. In
Oetting the beneficiaries' interests were modified by court decree, while in this
case Grace's interest was the result of her election to take against the will and
the ensuing settlement agreement. In both cases, however, the result is the
same in that the non-charitable beneficiaries' interests were then capable of
being measured and severed from the charitable property. In reaching its
decision, the Court in Oetting referred to Rev.Rul. 83-20, 1983-4 Int.R.B. 14.

22

In Rev.Rul. 83-20 the decedent's will had bequeathed the residue of his estate to
a charitable organization. Under the applicable state law, the surviving spouse
had been awarded an allowance for support, payable out of the residue, during
the administration of the estate. The allowance would terminate in the event of
the spouse's death or remarriage or upon completion of administration of the
estate. The question before the IRS was whether the charitable deduction
should be disallowed under Sec. 2055(e)(2) because an interest in the residue
had passed for both charitable and non-charitable purposes. The IRS concluded
that the deduction should be allowed, reasoning that the only property in which
the spouse had an interest was that portion of the residuary estate equal to the
maximum amount payable to her as an allowance for support. The ruling went
on to state that the "portion of the residuary estate certain to be received by
charity (or not subject to diversion for a noncharitable purpose) is property in
which no noncharitable interest exists and is therefore deductible and not a split
interest."

23

Under the settlement agreement in this case, it is clear that a certain portion of
the residuary estate is not subject to diversion for a non-charitable purpose. The
interest Grace received under the settlement agreement is analogous to the
allowance for support payments referred to in Rev.Rul. 83-20. The $50,000
lump sum plus the $600 per month for life in which Grace had an interest is
capable of being measured and severed from the solely charitable property in
the residuary estate.10 This is the only property in which a non-charitable
interest exists. The remainder of the property is not subject to diversion for a
non-charitable purpose and is certain to be received by the Scholarship
Foundation.

24

We also find Rev.Rul. 78-152, 1978-1 C.B. 296, cited by appellants, to be

persuasive.11 In Rev.Rul. 78-152 the decedent's will left the residue of his estate
in trust. The trust income was payable to his spouse for life and the remainder
was payable to a qualifying charity. The charitable remainder interest was not
in the form of a charitable remainder annuity trust or unitrust, or pooled income

fund. The spouse filed a timely election to take against the will. According to
the IRS, the filing of the election to take against the will prevented the noncharitable interest from passing under the will. The IRS allowed the charitable
deduction, reasoning that the property which passes from the decedent to the
spouse by reason of the election is not the same property that the charity takes
under the will.
25

The facts in the present case are very similar except that in this case the spouse,
after electing to take against the will, agreed to a settlement under which she
would receive a lump sum of $50,000 plus $600 per month for her life. The
distinction between these two situations is not one which changes the fact that
where the spouse's interest does not pass under the will, the property interest
which passes from the decedent to the spouse is not the same property that the
charity takes under the will.12

26

As explained in Oetting, Sec. 2055(e) was enacted to eliminate abuses of the

charitable deduction through the "split-interest bequest." 712 F.2d at 360.
Congress was concerned with instances where a non-charitable beneficiary
retained a substantial interest in the estate and benefited as well from a
charitable deduction for a remainder interest. "Often the deduction bore little
relation to the actual benefit ultimately received by the charity." Northern Trust
Co. v. United States, 41 A.F.T.R.2d 78-1523, 78-1524 (N.D.Ill.1977). The
special requirements of Sec. 2055(e) were meant to "provide a better means of
assuring that the amount received by the charity will accord with the charitable
deduction allowed to the donor." S.Rep. No. 91-552, 91st Cong., 1st Sess.,
reprinted in 1969 U.S.Code Cong. & Ad.News 1645, 2116, 2118.

27

This case involves none of the abuses which Sec. 2055(e) was enacted to
prevent. The charitable deduction sought by the bank does not exceed the actual
benefit to the charity; nor is the value of the charity's interest unascertainable.
Therefore, the deduction should be allowed.

28

The government also argues that if the charitable deduction is allowed, interest
on the overpayment should be calculated only from July 11, 1979, pursuant to a
specific provision of Sec. 2055(e)(3). As the government makes clear in its
brief, this special rule relating to accrual of interest applies only when Sec.
2055(e) is applicable. Since we conclude that Sec. 2055(e) is not applicable,
the rule applied by the district court, entitling the taxpayer to recover interest
from the date of overpayment to a date within thirty days of the issuance of the
refund check was proper. 28 U.S.C. Sec. 2411 (Cum.Supp.1983).

29

We affirm the judgment of the district court allowing the charitable deduction,

29

We affirm the judgment of the district court allowing the charitable deduction,
including the amount of interest awarded.

30

A true copy.

The Honorable Oren Harris, United States District Judge for the Western
District of Arkansas

Where an interest in property ... passes or has passed from the decedent to a ...
[charitable beneficiary] and an interest (other than an interest which is
extinguished upon the decedent's death) in the same property passes or has
passed (for less than an adequate and full consideration in money or money's
worth) from the decedent to a ... [non-charitable beneficiary], no deduction
shall be allowed under this section for the interest which passes or has passed to
the ... [charitable beneficiary] unless-(A) in the case of a remainder interest, such interest is in a trust which is a
charitable remainder annuity trust or a charitable remainder unitrust ... or a
pooled income fund ..., or
(B) in the case of any other interest, such interest is in the form of a guaranteed
annuity or is a fixed percentage distributed yearly of the fair market value of the
property (to be determined yearly). 26 U.S.C. Sec. 2055(e)(2).

[I]n the case of a will executed before December 31, 1978, or a trust created
before such date, if a deduction is not allowable at the time of the decedent's
death because of the failure of an interest in property which passes from the
decedent to a ... [charitable beneficiary] to meet the requirements of
subparagraph (A) or (B) of paragraph (2) of this subsection, and if the
governing instrument is amended or conformed on or before December 31,
1981, or, if later on, or before the 30th day after the date on which judicial
proceedings begun on or before December 31, 1981 (which are required to
amend or conform the governing instrument), become final, so that the interest
is in a trust which meets the requirements of such subparagraph (A) or (B) ..., a
deduction shall nevertheless be allowed.... 26 U.S.C. Sec. 2055(e)(3)

26 U.S.C. Sec. 664(d)(1) (Cum.Supp.1983)

26 U.S.C. Sec. 664(d)(2) (Cum.Supp.1983)

26 U.S.C. Sec. 642(c)(5) (Cum.Supp.1983)

"... If the surviving spouse elects to take against the will ..., then the property

interests offered thereunder are not considered as having 'passed from the
decedent to his surviving spouse' and the dower or other property interest
retained by her is considered as having so passed...." Treas.Reg. Sec.
20.2056(e)-2(c) (1983)
"If as a result of [a] ... controversy involving the decedent's will ..., a property
interest is assigned or surrendered to the surviving spouse, the interest so
acquired will be regarded as having 'passed from the decedent to his surviving
spouse' ...." Treas.Reg. Sec. 20.2056(e)-2(d)(2) (1983).
8

Because of our conclusion that Sec. 2055(e)(2) is inapplicable, we do not reach

the contention that the orders of the Chancery Court sufficiently amended the
trust as provided in Sec. 2055(e)(3), thereby qualifying for a deduction

The remaining one-fifth would, as provided in the trust, be held until the death
of the last of the three elderly ladies, with income paid to the remaining
beneficiary or her descendants per stirpes. Oetting, supra, 712 F.2d at 360

10

This is especially so in this case due to Grace's death on Aug. 31, 1975

11

Revenue rulings, while not controlling authority, can be persuasive. Bob Jones
University v. United States, --- U.S. ----, ----, 103 S.Ct. 2017, 2031, 76 L.Ed.2d
157 (1983); Oetting, supra, 712 F.2d at 362

12

The government claims that no deduction is allowable for a remainder interest

passing to a charity as the result of the settlement of a will contest where the
original bequest is not in the form of a charitable remainder annuity trust or
unitrust or pooled income fund. According to the IRS this situation is different
than where there is an election to take against the will. Revenue Ruling 77-491,
1977-2 C.B. 332, states that interests passing as a result of the compromise of a
will contest are traceable to the rights which are the source of the compromise;
therefore, an interest passing to charity pursuant to such a compromise is not
deductible if the charity's interest under the will being contested would not have
been deductible
Since there was no will contest in the instant case, and the charity received its
interest under the will and not under the terms of the settlement agreement,
Revenue Ruling 77-491 is not controlling. The settlement agreement under
which Grace took her interest was the result of Grace's election to take against
the will, not the result of the compromise of a will contest.
At least one court has held that even where the charity receives its interest as
the result of the compromise of a will contest, a charitable deduction is
available. Northern Trust Co. v. U.S., 41 A.F.T.R.2d 78-1523 (N.D.Ill.1977).

The court stated that the limitations on charitable deductions under Sec. 2055(e)
(2) were not applicable because under the settlement agreement the charitable
and non-charitable beneficiaries took separately. The court also pointed out that
the reason for the special requirements of Sec. 2055(e)(2), to provide a better
means of assuring that the amount received by the charity will accord with the
charitable deduction allowed the estate, did not exist in this situation. Northern
Trust, supra, 41 A.F.T.R.2d at 78-1525.
Rev.Rul. 78-152 expressly distinguished Rev.Rul. 77-491. We believe that the
facts in the present case are analogous to the facts in Northern Trust and the
circumstances as described in Rev.Ruling 78-152 rather than Rev.Ruling 77491.